The $1 trillion club has invited quite a few new members through its doors since Apple first broke through its threshold in 2018. Ten companies traded on U.S. stock exchanges have qualified for membership since, and that number should continue to grow over time as the world economy expands.
But predicting the next member of the club isn’t easy. For example, few saw Nvidia growing beyond a $1 trillion valuation by 2023, fueled by the recent breakthroughs in generative artificial intelligence (AI). It’s now a $3 trillion company. One company, however, has its sights set on joining, and management thinks it can reach a $1 trillion level by 2030.
While management typically shouldn’t operate a business with a goal of reaching a certain stock price, this company has a systematic approach to increasing earnings every year, and it should eventually push it to double its stock price and reach a $1 trillion valuation. Here’s why Netflix(NASDAQ: NFLX) could be one of the next members of the vaunted club.
Image source: Getty Images.
Netflix already boasts a $500 billion valuation as of this writing. That qualifies it as one of the biggest companies in the world, far larger than any other media company. But Netflix has a big advantage over traditional media — it’s not tied down by declining legacy operations like linear TV networks. That’s resulted in relatively consistent revenue growth.
As mentioned earlier, Netflix has taken a systematic approach to growing its business. Since it operates a subscription business with a direct line to its customers, its revenue is fairly predictable. It plans content expenses well in advance of when they hit its income statement through long-term licenses and, increasingly, its own productions. As a result, it’s able to set a target operating margin each year, and it consistently comes very close to that target.
As a result, Netflix has increased its operating margin from 13% in 2019 to 26.7% in 2024. For 2025, management is targeting 29%. Its first-quarter results exceeded that level and management expects even stronger margins in the second quarter, before higher expenses eat into profits in the second half of the year.
Consistent expansion in operating margin is key to Netflix’s plan to reach a $1 trillion valuation. Management thinks it can double its revenue between 2024 and 2030, but it expects operating income to grow threefold. That implies an operating margin of about 40% by 2030, an expansion of 11 percentage points from its 2025 target. Since Netflix has historically expanded its margin about 2 percentage points in a normal year, that target is reasonable.
Further supporting Netflix’s growth is its strong free cash flow. After years of borrowing funds to invest in original content, the company turned cash-flow positive again in 2022. Last year, the business generated $6.9 billion in free cash flow and management expects that to grow to $8 billion this year. The cash gives Netflix management more flexibility to invest in content or acquisitions for growth, or return capital to shareholders through share repurchases.
But the path ahead won’t be easy for Netflix. The company faces a big challenge going forward.
Netflix has made a big shift in its strategy over the last few years by introducing an ad-supported tier to its offerings. It’s seen a lot of early success with advertising, and it’s moved to bring its ad-tech in house to generate better-performing ad units and improve the economics of the ad business. Management thinks advertising revenue can double in 2025 and grow to a $9 billion business by 2030.
There are a couple challenges this shift creates. First of all, advertising revenue isn’t as predictable as subscription revenue. Ad sales are much more cyclical, so an economic slowdown will negatively impact the new business.
The second challenge is balancing the ad-supported tier with the ad-free tiers for subscribers. Netflix expects the ad-free tiers to remain the biggest source of revenue and growth for a long time. That growth will come partially from raising prices to maintain parity between revenue from subscribers with ads and those without ads.
Image source: Netflix.
However, Netflix isn’t the only streaming service in town anymore, and that puts a cap on how much it can charge consumers before they’ll look elsewhere for their entertainment. Even if Netflix continues to increase its content budget, the marginal value of another series viewers love on Netflix might not be worth a higher price for many of them.
To that end, Netflix may find the advertising tier an even more valuable piece of its business by 2030. Advertising can provide an additional boost in revenue for each extra minute Netflix viewers spend with the service, and that might not be true with the ad-free tiers. But that comes with the downside of less predictable revenue, making it more difficult for Netflix to hit its operating margin targets.
Still, Netflix’s goals seem reasonable, even if it won’t be as easy for management to grow like it has in the past. If management continues to focus on its core financial goals of double-digit revenue growth and incrementally expanding its operating margin each year, it will be only a matter of time until reaches a $1 trillion valuation.
Successfully tripling operating income means Netflix will also need a valuation of about 32 times its operating income in 2030. That’s well below its historic average, so it’s not out of the realm of possibility. That said, management should focus on the financial goals and let the market valuation figure itself out on its own.
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Adam Levy has positions in Apple and Netflix. The Motley Fool has positions in and recommends Apple, Netflix, and Nvidia. The Motley Fool has a disclosure policy.
